Fast Food Chains Lay Out Aggressive Growth Plans But Not Everyone Will Meet Their Targets

by Trefis Team
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Sending out a clear warning to industry rivals, Yum! Brands (NYSE:YUM) intends to double the sale of its Taco Bell brand to $14 billion within the next eight years. The management is embarking on a two-pronged approach to meet its target: boost the average restaurant sales to $1.8 million from $1.3 million currently and add another 2,300 stores. Compared to McDonald’s (NYSE:MCD), which has 14,000 stores nationally, Taco Bell only has 5,700 stores and the management definitely sees scope to add some more. [1]

Restaurants that are typically associated with lunch or dinner are now stepping up their presence in breakfast hours. After a few early tests, Taco Bell will be rolling out its breakfast menu by the end of next year. Items such as crunchy breakfast wrap, bite-size Cinnabon-branded cinnamon rolls, oatmeal and coffee will be offered as part of their breakfast lineup.

Similarly, restaurant chains such as Dunkin’ Donuts owned by Dunkin’ Brands (NASDAQ:DNKN) that generate most of their sales during breakfast are now expanding their menu in order to attract more customers post-noon. It added 30 items to its menu including Breakfast Burritos, the Roast Beef Bakery Sandwich etc in 2012, to be better associated with the lunch segment. In 2013, some of the new items to watch out for are Turkey Sausage Breakfast Sandwich, Angus Steak and Egg Breakfast Sandwich, among others.

Dunkin’ Donuts is on an expansion spree of its own doubling the number of restaurants to 15,000 by 2020. The Western part of the country and states such as Texas represent huge untapped markets so the potential to expand is certainly there. Moreover, the last couple of years has seen the number of stores rising within the U.S. (243 and 291 new stores were opened in the U.S. in 2011 and 2012 respectively). This year Dunkin’ will add 330 to 360 new stores in the country.

See full analysis for Dunkin’ Brands

In that regard, McDonald’s restaurant level economics are pretty strong. Despite its ubiquitous presence, each McDonald’s store on an average is able to generate $2.5 million worth of sales in the U.S. But that is where the trouble starts for McDonald’s. There aren’t many opportunities to generate incremental sales. Breakfast already accounts for about 25% of its total sales. Therefore, the chain is opting for the more traditional low-price approach by expanding its dollar menu.

And then there are other restaurant chains like Chipotle Mexican Grill (NYSE:CMG), which continues to expand aggressively within the U.S. Although its menu is priced higher than other fast food chains, it offers value proposition through the use of fresher and naturally raised ingredients while using more sophisticated cooking methods. The company is looking to open another 170-180 new stores in the U.S. this year.

Clearly, the mature U.S. restaurant industry market doesn’t have the room to accommodate the growth plans of all restaurant chains. The long term growth of the market size is expected to be in the region of 1-1.2% on an inflation adjusted basis, which should translate to about ~3% on a nominal basis. [2] Either some of the big players will miss their aggressive targets or a few of the smaller players will get gobbled up. Although restaurants lay out a clear strategy in order to achieve their targets, not all of them will be able to meet them.

We have a $40 price estimate for Dunkin Brands, which is roughly in line with the current market price.

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Notes:
  1. Analysts: Yum plans to double U.S. Taco Bell sales, May 22, 2013, nrn.com []
  2. Projecting the restaurant industry’s economic might, restaurant.org []
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